Benefits August 26, 2013

Fidelity Offers Tips for Improving Retirement Readiness

August 26, 2013 (PLANSPONSOR.com) – Retirement plans that instituted retirement readiness best practices into their design saw employee retirement savings rates increase up to 74% following such changes.
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A new report from Fidelity Investment, “Defining Excellence: Plan Design and Retirement Readiness in the Not-for-Profit Healthcare Industry,” examined best practices in retirement plan design that can help improve overall retirement readiness of nonprofit health care employees.

“We are continuously leveraging Fidelity’s proprietary plan and participant data to identify trends and develop best practices in retirement plan design,” said John Ragnoni, executive vice president, Tax-Exempt Retirement Services, Fidelity Investments. “Through this analysis, we have enhanced our industry-leading benchmarking capabilities to educate nonprofit health care institutions on plan design changes that can improve employee participation and encourage positive retirement savings outcomes.”

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The best practices covered in the report include:

  • Increasing plan participation rates by implementing automatic enrollment and employer matching contributions;
  • Increasing the employee savings rate by implementing an annual increase program;
  • Strengthening employee asset allocation by using a target-date fund as the default investment option;
  • Increasing employee engagement in retirement planning by making education and guidance resources available to employees; and
  • Determine a metric to measure readiness and communicate this information to employees.

“Using these insights, our benefits team is partnering with Fidelity to review plan design and employee engagement strategies that will improve the competitiveness of our plan and help our employees be better prepared for retirement,” said Patricia O’Neil, vice president and treasurer at Rush University Medical Center in Chicago.

With plan participation rates, the report found that employers can help overcome employee inertia by using plan features such as automatic enrollment and employer matches. Plans with automatic enrollment showed an average participation rate of 80% versus 51% for plans not utilizing this feature. Only 24% of nonprofit health care plans were found to use it, compared with 42% in the corporate sector. Plans with an employer match were found to have an average a 53% higher participation rate than those not offering it.

According to the report, the nonprofit health care industry is currently averaging a 9.4% total savings rate. An annual increase program (AIP) can be used to improve savings by an average of 74%, increasing employee savings deferral rates from an average of 4.2% up to 7.3%. Research revealed, however, that only 39% of plans use AIPs.

Nonprofit health care plan sponsors have increased their utilization of target-date fund default investments from 72% at the end of 2009 to 80% at the end of 2012, according to the report. When plans offer target-date funds as the default investment option, the report found that there is a 73% increase in the number of employees properly exhibiting age-based allocation.

Fidelity’s data also showed that employee guidance is effective at driving positive behaviors. Of the employees receiving guidance, 38% took constructive actions such as increasing their savings rates or adjusting their asset allocation. Overall guidance utilization also increased by 16% from 2011 to 2012.

The report also concluded that employers need to assess the health of their plans by choosing a retirement readiness metric and applying that metric to employees within the plan. However, only 53% of plan sponsors were found to have established a metric to measure the overall health of their retirement plans.

The Fidelity report is based on business data of more than two million employees and 600 nonprofit health care retirement plans, representing approximately 30% of the market. A copy of the report can be downloaded here.

Administration August 26, 2013

Improvement Needed for State Pension Funding Levels

August 26, 2013 (PLANSPONSOR.com) – U.S. state pensions are showing some signs of stabilization, but significant improvement in funded levels will take many more years, said a new survey.
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According to “A Bumpy Road Lies Ahead For U.S. Public Pension Funded Levels” from Standard & Poor’s Ratings Services, the 50-state average funded ratio fell by about 1% to 72.9% in 2011 compared with 73.7% in 2010. This was smaller than the 1.6% drop noted in the 2010 survey and much smaller than the 7% decline from 2008 to 2009. The 50-state median fell by 2.2% to 69.8% from 72%–a similar rate of decline as in 2010 (2.1%) and much lower than the 6% decline in 2009.

The road to pension funded level improvement will be bumpy, said the survey’s authors. Although a decelerating rate of decline is positive, they expect states will need to actively manage pension funds to ensure their long-term sustainability. The authors also expect to see factors such as market volatility, the implementation of Governmental Accounting Standards Board (GASB) Statements 67 and 68, and ongoing pension reform efforts to affect pension valuations. For weaker funded systems, the authors see a problematic funding environment as growth in pension contributions consumes a larger part of those states’ budgets.

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The survey also found that states continue to operate cautiously, given uncertain revenues and expenditures. Although revenues for most states have returned to pre-recession levels, they have not kept pace with spending pressures. State officials are facing budget challenges as they deal with demands to restore service levels, reduce taxes and implement the provisions of the Affordable Care Act (ACA).

Other findings by the survey include:

  • Pension funded ratios continue to decline as the investment losses from 2008 and 2009 are smoothed into actuarial value of assets. However, these declines seem to be decelerating;
  • Efforts to reform pension systems are far from over and are intensifying as more policymakers look to make structural changes to their systems that will significantly lower liabilities;
  • The implementation of GASB pension reporting and accounting changes, in most cases, will result in the reporting of a greater and more volatile unfunded pension liability;
  • States’ decisions on what pension funding policy to adopt and their discipline in adhering to the policy are likely to shape the future direction of pension funded levels; and
  • Most states have sufficient assets in their pension trusts to fund benefits payments over the near to medium term and in many cases, long term. Under the new GASB statements, the crossover point used for discount rate blending will better identify situations when assets will no longer be available to fund benefits.

Standard & Poor’s covered valuation data through 2011 for all state-sponsored plans. The data showed that the average funded ratio continued to weaken, although only slightly. The data was from 2011 valuations and reported in the states’ 2012 comprehensive annual financial reports (CAFRs), the latest year for which CAFRs are available. The wide spread between the highest and lowest funded state plans showed the significant variation among the funded ratios of state plans.

In 2011, pension funded ratios dropped for 34 of the 50 U.S. states, remained unchanged for six, and increased for the remaining 10 states, according to the survey. The average funded ratio change for the 50 states was -0.8% but changes to individual plans ranged from a 7.3% decline to as much as an 11.6% increase. When looking only at the states that had declines, the survey found that the average drop was 2.5% with a median decline of 2.2%. Of the 13 states that had increased funded levels, the average increase was 3.9% with a median increase of 1.6% and ranged from 0.2% to 11.6% increases in individual funded ratios.

The top five states by funded level include Wisconsin (99.9%), South Dakota (96.3%), North Carolina (95.3%), Washington (93.7%) and New York (92.7%). The bottom five states in terms of funding level include Illinois (43.4%), Kentucky (53.4%), Connecticut (55%), Louisiana (56.2%) and New Hampshire (57.4%).

To purchase a copy of the survey or to subscribe to other Standard & Poor’s research material, please go here.

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